China Releases Draft Export Control Law
for Public Comment
July 21, 2017
China Trade Controls

On June 16, 2017, China’s Ministry of Commerce (MOFCOM) released for public comment adraft of the Export Control Law (“the Draft Law”). While China has a number of regulations
relating to export controls and has signed numerous nonproliferation agreements, the Draft
Law would be China’s first law specifically addressing export controls and would implement
an export controls system that protects China’s national security and consolidates its
nonproliferation efforts. This new law, if enacted as drafted, would bring China’s systemsomewhat closer to other export control regimes and has the potential to affect both
domestic and international players that are exporting certain items and technologies out ofChina. The Draft Law also introduces new restrictions on the provision of “export controlrelated information” outside of China, highlighting the government’s desire to tighten thecontrol of cross-border transfers of technical data related to controlled items. The Draft Law
is expected to be introduced to the National People’s Congress for a first reading in 2018.

Background of the Draft Law
The Draft Law represents a continuation of the Chinese government’s efforts to strengthen
national security during President Xi Jinping’s administration, focusing specifically on theexport of nuclear, biological, chemical, military, or other dual-use goods and services.
China began to formulate export control regulations in the 1990s. In its drafting notes,
MOFCOM highlighted three reasons to enact a stand-alone Export Control Law now: (i) theexisting regulations have weaker legal authority as departmental regulations; (ii) the mostrecent export control regulation was promulgated a decade ago in 2007 and has not been
updated regularly; and (iii) the current system is unable to support enforcement actions inpractice.

Key Points of the Draft Law
Definition of “dual-use” and “military items.” The Draft Law provides basic
definitions of key terms:
“Dual-use” is defined as “goods, technologies, services, or other items that have
civil uses, and also have military use or enhance military potential, particularly thedesign, development, production, or use of weapons of mass destruction.”“Military items” are defined as “equipment, special production equipment andother materials, technology, and related services used for military purposes.”www.cov.com

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“Nuclear” is defined as “nuclear materials, nuclear equipment, non-nuclear
materials used in reactors, and related technologies and services.”The draft does not define “export” or “regarded as an export” (视同出口)Re-Exports. Re-exports—the transfer of an item from a country outside of China to athird country—were not previously addressed by regulations. The Draft Law would
apply to items produced outside of China if “the value of the Chinese-controlled
goods reaches a certain percentage of foreign products.” The Draft Law does not
specify those percentages, which we anticipate would be addressed in subsequent
implementing regulations.

Deemed Exports. The Draft Law defines providing regulated goods or technologies
to non-Chinese citizens (or to residents of Taiwan, Hong Kong, or Macao) as“exports”, even if the goods or technologies have not been transferred outside ofmainland China. This newly expanded definition of “export” appears to regulate
activities such as non-citizens who work in China viewing controlled equipment or
technical data.

Export Control System. The Draft Law aims to establish a unified export control
system that has two elements: a controlled item list and a license system forexporters. The Draft Law does not contain the list, although presumably it will buildfrom existing lists scattered across different laws and regulations. Some
commentators suggest that two separate lists may be developed—one for dual-use
items and one for military items. It is unclear whether China will continue to use its
current system based on HS codes. In addition to the controlled item list, Article 14
allows certain agencies to designate a particular product or technology that is not on
the list as a “temporarily controlled item” for up to two years.
In formulating the list, the agencies are also to look at, among other things,“technological development” and “competitiveness.”
The license application would include a technical description of the item, an end-userand end-use statement, and a copy of the contract or agreement between theparties.
Seven factors are to be considered when the licensing agency makes licensing
decisions:
1. national security and development interests
2. international obligations and external commitments
3. degree of sensitivity of the item
4. market availability
5. end-user and end-use
6. internal compliance systems of the exporter
7. other circumstances prescribed by laws and regulations

Agencies and Their Responsibilities. The Draft Law does not clearly identify
departments under the State Council and the Central Military Commission that will
perform the functions of export control, although it states that different agencies will
regulate and license different controlled items under the Draft Law. For example,
China Atomic Energy Authority, the Commission of Science, Technology and the2China Trade Controls

Industry for National Defense and MOFCOM will jointly manage nuclear exports.
Export control agencies in general will enjoy significant authority such as conductingsite inspections of end-users. Article 31 also provides that where China has enteredinto international agreements that already provide export control licensing guidelines(e.g., sanctions and embargoes), those provisions will take precedence. Military aid
is specifically exempted from the scope of the Draft Law.
The Draft Law does not describe how the agencies will work together, or outline aprocedure whereby a company can seek a ruling to determine which agency has
jurisdiction over regulating and licensing exports.
National Security Assessment for the Provision of “Export control-related”
Information. The Draft Law specifically requires the national security assessment forthe provision of “export control-related” information “abroad.” However, Article 10
does not define how procedures for such a national security assessment for theexport of controlled information will be conducted. It is uncertain whether and how
this requirement will be consolidated with the cross-border data transfer requirements
imposed by the Cybersecurity Law. (See our recent alert here.)Penalties for Noncompliance.
Potential penalties for exporters: Exporting without a license, obtaining a license
through bribery or other fraudulent behavior, circumventing export control
measures, or conducting transactions with parties on the blacklist each could
result in a fine that amounts to five to ten times the value of the illegal gain. In
addition to the penalties on the company, the responsible person may be fined
between RMB 100,000 to 300,000 (about USD 15,000 to 45,000).

Potential penalties for parties facilitating illegal conduct: Third parties providing
freight services, customs declarations, electronic trading platforms, and financial
services to exporters that violate the Draft Law will be fined five to ten times ofthe illegal gain. The responsible person may also be fined between RMB 100,000
to 300,000 (about USD 15,000 to 45,000).

Investigation and procedural rules:○If an exporter applies for a license using fraudulent information, theapplication shall be denied and a fine between RMB 30,000 to 150,000 (aboutUSD 4,500 to 22,000) will be imposed.

○

Obstruction of investigations (including non-cooperation with a site inspection)
may result in penalties of between RMB 100,000 and 300,000 (about USD
15,000 to 45,000). In addition, the responsible person may also be fined
between RMB 100,000 and 300,000(about USD 15,000 to 45,000).

○For exporters and individuals who violate this Draft Law, their information may
be added to the national credit system database and made public. Exportcontrol agencies may deny applications for export licenses filed by thesecompanies or individuals for three years after the penalty decisions.

Potential Implications
Companies active in China should continue to track the legislative developments and beaware of how the Export Control Law, if enacted as drafted, might affect their operations,sales, or other relevant actions. Based on the wording of the draft, exporters and theircustomers may face additional burdens, such as on-site inspections of end-users, as well as
strict licensing review processes.

3China Trade ControlsIf you have any questions concerning the material discussed in this client alert, please contact thefollowing China-based members of our International Trade practice:
Eric Carlson
Yan Luo+86 21 6036 2503
+86 10 5910 0516

ecarlson@cov.com
yluo@cov.com

This information is not intended as legal advice. Readers should seek specific legal advice before
acting with regard to the subjects mentioned herein. Only qualified nationals of the PRC working in
PRC law firms are permitted to practice PRC law. Accordingly, as is true for all non-PRC law firms, wecannot express any legal opinion concerning the interpretation or application of PRC law.
Covington & Burling LLP, an international law firm, provides corporate, litigation and regulatory
expertise to enable clients to achieve their goals. This communication is intended to bring relevant
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